Profit Margin

One ratio of particular importance in evaluating a firm’s income statements is profit margin. Profit margin is a measure of a firm’s return on sales that is computed by dividing net income by net sales.

A firm’s profit margin tells it what percentage of every dollar in sales contributes to the bottom line. An increasing profit-mar÷gin means that a firm is either boosting its sales without increasing its expenses or that it sis doing a better job of controlling its costs. In contrast, a declining profit margin means that a firm is losing control of its costs or that it is slashing prices to maintain or increase sales.

  Profit Margin = Net Income ÷ Net Sales

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